Saturday, April 30, 2005

Additionally, a fellow Jim Rogers fan was nice enough to pass on this recent interview with Jim Rogers, which contains additional insight into his thinking.

Quotes:

Q: There’s been some speculation that segments of the commodities markets such as uranium may be getting overheated. Could we be due for pull-back?

JR: There may well be. If there’s a hard landing in China everything is a little overheated right now. But, to repeat myself, with fewer than five mutual funds in the whole commodities world, and 40,000 mutual funds in stocks and bonds, I hardly think this is the end of a bull market.

Q: There is yet more upside.

JR: Absolutely. Even oil should be more than twice the price it is now, just to be adjusted for inflation. And inflation numbers are fraudulent – the U.S. government reports inflation numbers that are false. Oil should triple if you use the real inflation numbers.

Q: So, even at $50 a barrel, oil is a good investment, long-term?

JR: Many people will tell you that the price of oil should be $35 or $28. It’s true that if there’s a hard landing in China it may dip down. But I say to these people, tell me where the oil is coming from that’s going to drive down the price down and keep it down. There have been no giant oil discoveries anywhere in the world in over 35 years. I want to know where this oil is coming from that’s going to drive the price to $28. If it’s out there I want to know about it so I can buy it myself!

Q: Right. Even OPEC have abandoned their $22-$28 price target.

JR: No one knows where the oil is. All these people who are saying oil is going to go down… there might be some blips along the way, but where is the oil that’s going to drive it down and keep it down? Oilfields around the world are in decline. The U.K. has been one of the world’s great oil exporters for 25 years. But it’s going to be importing oil within the decade.

Q: In terms of your investment strategy, what sort of a trigger would you look for to start selling the oil you own now? Is there a specific price you’d pick as the top?

JR: In 2014 or 2018, I’ll think about selling oil. But right now I have no intention to sell.

When pressed by Aljazeera.net on whether countries such as Saudi Arabia, the subject of his forthcoming book Twilight in the Desert, would really open their fields up to outside audits, Simmons replied: "I think they will be forced to, yes, I think that will happen."

Despite this outlook the investment banker was also keen to stress that he was "an optimist" on the future of energy.

Though there are some downer predictions in his book, Deffeyes chooses to end with a section called "Personal Investments" and writes "If energy prices are fated to become increasingly unstable and increasingly higher, then direct ownership of energy resources becomes attractive" and indicates that his personal choice is energy trusts. The section before that is titled "Individual Actions" and recommends various sensible options for reducing your energy usage/dependency.

You can read an article about energy trusts here and a list of further names is available here. Keep in mind that they tend to make your taxes slightly more complicated.

Phil Verleger, an energy economist associated with the Institute for International Economics in Washington, DC, reckons that the cartel itself may be to blame for the speculation: by declaring its intention to prop up prices, first at $30 and now at $40, “OPEC has given Wall Street a free put option” (because investors believe the cartel will cut output to stop prices falling).

Supply constraints coincided with a huge boom in oil demand. Global oil consumption last year increased by 3.4% instead of the usual 1-2%. Nearly a third of that growth came from China, where oil consumption rocketed by perhaps 16%. One senior European oil executive claims that, in contrast with the embargoes and supply-driven price rises of the past, “This is the first demand-led oil shock.”

And it was not just China that used a lot more oil. India's oil consumption too leapt last year, and America's was quite robust. In fact, despite $50 oil, global oil demand in 2004 grew at the fastest rate in over 25 years.

“The illusion that oil is in perennial oversupply has led to two decades of underinvestment in the oil industry. The world has been living off the legacy spare capacity built up many years ago.”

Given today's high prices, surely the market will soon enough provide the necessary new infrastructure? Probably not, for two reasons. The first is that the world seems to be coping rather well with today's shockingly high prices, so perhaps they have to persist for longer or rise higher still before investors are stirred into action. The second reason is the bitter memory of oil at $10 a barrel.

OPEC countries are unlikely to rush to build lots of spare capacity because they are worried that another price collapse may follow. PFC Energy observes that when the oil price hit $55 late last year, spare capacity was less than 15% of the 8.7m bpd peak reached in 1985, and notes: “OPEC national interests do not lie in creating large capacity surpluses that have existed for most of the history of oil.”

The western oil majors are even more terrified of another price collapse, and are keeping a tight rein on their capital expenditure. Projects are typically “stress-tested” for profitability at $20 a barrel or below. Some argue that Big Oil is being too cautious. But nobody thinks that spare capacity will ever return to the gold-plated levels of the mid-1980s.

On the other hand no careful observer could fail to see that just now OPEC appears to be overproducing by 1m b/d and I continue to caution that a period of short-term weakness is still quite likely.

Indeed, when I reflect on the latest OPEC10 increase to 27.5m b/d and Saudi adding further that it was turning the taps on, I find myself puzzled at the continuing strength of the oil price. Particularly as I think it underlined that for political reasons Saudi Arabia really does want a price below $50. So what is going to happen next? I think oil will hit $45 in the next 2 months. How likely ? 60/40.

Turning to a slightly longer time horizon, we are increasingly confident that the US and China along with the rest of emerging Asia and the Middle East and the FSU are going to continue to provide robust demand growth. We accept it will likely fall back from the 2004 level which was exceptional but we note that very recently Chinese authorities have been warning of the rapid worsening in power shortages which will support oil imports to run back-up generators. In the medium term, growth in car ownership is going to be hard to stop and with that will come high rates of oil consumption growth for 10 ? 20 years. We also see an emerging consensus that the global economy can cope with oil prices at much higher levels than previously thought.

We also believe the impending difficulty of growing non-OPEC supply is considerable.

Therefore over the medium to long term OPEC can, and likely will, pursue policies which mean oil will trade considerably above the old $22-28 target range, probably over $40 WTI now and we would not be remotely surprised to see a new target range within a few years of $50 -60 which is where the price in real terms averaged for 12 years 1974 -85.

Looking at the big picture, I remain ever more convinced that the medium term outlook is for a decisive break with the $25 oil of the 1986- 2000 period and a shift back to the $55+ world of 1975 ? 1985. Meanwhile, the odds on a sizeable dip are reducing as OPEC starts taking the necessary action and Russian production growth slows.

If you're reading this, and you know people making decisions now that will not work longer term with more expensive energy, I believe you ought to try to explain the implications of cheap oil getting scarce. They may not listen right away, but you will have raised their awareness.

Wednesday, April 27, 2005

We continue to believe that oil could fall further, perhaps to the mid or low 40’s. The reason is that OPEC is pumping at close to 100 percent capacity at a time when worldwide demand is at a seasonal low. It is a gambit designed to change psychology in the oil market prior to a sharp pick-up in demand during the third and fourth quarter.

In other words, during the second half of the year OPEC is hoping to have enough credibility to talk oil down. We hope it works, but ultimately think economics will prevail. The stark fact is that by the fourth quarter the world’s demand for oil will far exceed potential supply, which could set the stage for dramatically higher prices.

We are not going to try to finesse the situation by reducing our oil and metal weightings now in the hope of getting back in at lower prices. Rather we are willing to suffer a little near term pain than risk being left out when energy and metal stocks inevitably resume their uptrend.

I like to track what the old timers think, because they've often been through many cycles, learned hard (and valuable!) lessons, watched history unfold with their own eyes, and seen several bubbles form and later pop, thus developing a better sense of what's a bubble and what's not.

So this 79 year old oil man with a history of good predictions is the kind of person I want to read about.

The joke is that Mr. Groppe is not so much a fan of such history as a witness to it. He is 79, landed in the oil and petrochemicals industry in 1946 and became an oil consultant in 1955, when he formed Groppe Long & Littel. That probably makes him the oldest active oil guru in the United States. The man knows a thing or two about oil production and prices and what he will tell you in his charming Texas drawl isn't pretty: The "peak oil" theory is no theory, son -- it's happening.

The old guy is not often wrong. For instance, in 1980, when governments, economists and oil companies warned of $100 oil, Mr. Groppe predicted a $15 price by 1985, half its 1980 price. He was right. In 1998, an Economist magazine's cover story, "Drowning in Oil," suggested prices were headed to $5. Mr. Groppe called for a big jump in prices. A year later, oil was on is way to $30.

Canada, thanks to Alberta's oil sands, is the only non-OPEC country whose production probably will keep rising over the next decades.

"We produce two to three times as much each year as we find," Mr. Groppe says. He doesn't think we're running out of oil -- just cheap oil. "We ran out of $2 oil in 1973; it had been $2 a barrel for 25 years," he says. "Then we ran out of $8 oil, then $15 oil. Now we're running out of $40 oil."

This week, oil prices, which went as high as $59 a barrel earlier this year, rose about 6 per cent to more than $55. If he's right, Goldman Sachs's shocking forecast that oil could hit $105 a barrel is not so shocking after all. Not surprisingly, Mr. Groppe is bullish on oil stocks.

Monday, April 25, 2005

"There has been no great oil discovery in the past 35 years," he argues. "The North Sea has peaked. Alaska is in decline. Mexico is in decline. All these great oilfields are in decline. To anybody who thinks I am lying about this, I would ask: where is the oil going to come from?

His bearishness on the US dollar is predicated on economic fundamentals, notably the balance of payments. Alan Greenspan, the chairman of the Federal Reserve and Rogers' bogeyman-in-chief, has been printing money on an unprecedented scale and President George Bush has been spending it just as rapidly.

"The US owes the world $8 trillion," he argues. "We are the world's largest debtor nation by a factor of many times and our foreign debts are increasing by $1 trillion every 21 months. That's terrifying.

"People need to understand about this major change in the world and about the demise of the US dollar. The US dollar is going the way that sterling went as it lost its place as the world's reserve currency. I suspect there will be exchange controls in the US in the foreseeable future. It will be a complicated and difficult currency."

Hand in hand with this faith in the value of commodities is a long-term confidence in China, whose appetite for raw materials has already fuelled a strong rise in commodity prices in the past 18 months. All the best capitalists live in communist China, he argues, and overseas Chinese are returning with their capital and expertise. He has employed a Chinese nanny for his one-year-old daughter. Mandarin will be the most important language in his child's lifetime, he thinks.

But even this China bull predicts a major economic slowdown there, with accompanying political unrest, very soon. In this, he is not wholly out of the line with the consensus thinking - City economists are currently debating whether China's landing, after a decade of extraordinary growth, will be hard or soft. Rogers' view is that it will be very hard, but will also represent a golden investment opportunity.

"I remind you of the last two times that China had to cut back an overheated economy," he says. "In the late 80s, it led to Tiananmen Square when things got out of control and the second time was in the mid-90s, when they had to devalue their currency. Sometime this year or next you will see headlines in the Guardian, 'Turmoil in China'. At that point, you buy all the China you can and all the commodities you can because that will be bottom of the consolidation in commodities and consolidation in China."

Buying in the face of prevailing hysteria is a principle that has served Rogers well over the years. Crisis in China - however serious it looks at the time - will merely mark the end of the first leg of this new bull market, he thinks.

"Remember," he enthuses, "that the second leg is wonderful, and the third leg is spectacular. In the fourth leg, there is dancing in the streets and in the fifth leg people are hysterical and everything is skyrocketing every day. We are nowhere near the second leg, much less the third, fourth and fifth legs."

Saturday, April 23, 2005

There are some people who speculate that the high cost of oil recently has more to due with oil producers manipulation than anything else.

Obviously, most of us who believe in Peak Oil dismiss that immediately, but I'm not willing to dismiss it 100%.

Here's why:

For those of us around the oil poker table (er, market), consumers, producers, intermediaries, speculators, Peak Oil is now a very big part of the game. And Peak Oil means that oil produced in the future is likely going to be worth more (and perhaps much more) than oil produced now.

So if you were a producer, or even just an intermediary or speculator, intent on maximizing your revenue not just in this hand, but over the course of the game, you probably would now want to s-l-o-w the game down some, maybe let the clock run down a little (oops, mixed metaphor, sorry) as oil gets pricier and what you have in the ground gets more valuable. Maybe you slow negotiations down, maybe you fight over tax revenue, maybe you rattle sabers geopolitically, maybe you spread FUD by devouring your own corporation; whatever it takes to keep the game going a little longer and make the other players, the consumers, sweat a little.

I'm thinking here in particular of producing players like Russia, Iran, Venezuela, the rebels in Africa, anti-coastal drilling Californians, even to some extent the Congress re: ANWR. All with different agendas, but ultimately also players trying to maximize their revenues. And when you add up the oil and natural gas in those places, you end up with some very significant numbers.

As consumers, our reaction is outrage. But if Peak Oil is real, then maybe these people are doing humanity a favor. By holding back a little, stretching out that supply, maybe we delay the peak some, maybe we plateau a little longer, maybe we give the invisible hand more time to work it's magic and kill demand.

PS. After I wrote this, I ran across this article about Chris Moneymaker ExxonMobil, and the following probably too candid quote:

Exxon's CEO was quoted this week as saying, "If we wanted to just add more volume, we could do that." But he said, "That's not the objective."

What is? His President responded: "You give me a choice of producing more barrels or making more money, I am going to make more money every time."

Saudi Arabia, facing mounting pressure from the U.S. and others to step up output of oil and gas amid a surge in prices, plans to more than double its investment in energy development to $50 billion in the next five years from the previous five-year period.

Ali Naimi, Saudi Arabia's oil minister, also said the kingdom had tossed aside its production cap set by the Organization of Petroleum Exporting Countries and is willing to sell its customers every barrel of oil they want, up to its current capacity of 11 million barrels a day. The planned increase in investment, Mr. Naimi said, would boost the kingdom's oil-pumping capacity to 12.5 million barrels a day by 2009, a target Mr. Naimi had previously disclosed. Saudi Arabia also has said it was studying longer-term plans for capacity increases to about 15 million barrels a day.

While declining to identify a single "right price" for oil, the Saudi energy czar said that "in today's world, $50 a barrel [for the U.S. benchmark crude] is too high a price, and $15 to $20 a barrel is too low." A fair price, he said, would be one that is neither so high it hurts demand for oil nor so low it discourages companies from investing in finding new sources of fossil fuel. Mr. Naimi noted that some experts have suggested that investors in oil production could get the returns they seek if crude fetched around $35 a barrel for a basket of oil types sold by OPEC. That would work out to about $40 for U.S. benchmark crude. He cautioned that he didn't endorse that figure.

PS. Tossed aside OPEC production limits and suggesting we need to find new sources of fossil fuel? We really are in the Twilight Zone.

Thursday, April 21, 2005

The president said he plans to ask the Saudi prince whether it is possible for his country to step up oil production.

"I think they're near capacity, and so we've just got to get a straight answer from the government as to what they think their excess capacity is," Bush said, adding that he would not characterize the Saudi production as "flat-out" yet.

Tuesday, April 19, 2005

"Most investors are only familiar with oil cycles in the 1990s, when the price modulated gradually and moderately," Murti says. "The current environment is more like the 1970s." That may not sound like great news for consumers or business, but remember that the '70s weren't a bad time to own oil stocks. Which is the point of Murti's report in the first place. He's an oil analyst. Recommending oil stocks is his primary charge.

"The fundamental shift is not a bubble generated by speculation, but that of a systematic upward shift in the long-term price of oil," Jeff Currie, a managing director at top energy derivatives trader Goldman, told an energy conference.

"I'd like to argue that we actually have a bear market right now at $50 per barrel of oil," Currie said.

Based on our analysis of the intense economic, crude oil, and military confrontations developing among the China Rim region’s largest economies, we believe that the most aggressive crude oil price targets calling for $100 per barrel within the next three years will prove to be conservative. In our view, specific crude oil price targets are the realm of financial organizations with equity and commodities trading desks. As a pure independent research firm, we have neither. However, it is our opinion that the “likely direction of surprise” in crude oil prices will continue to be to the upside.

It's traditional for countries with problems to try to direct their population's anger externally, so this article [reg req] in the NY Times supports the idea that trouble may be stirring in China.

In his book "The Oil Factor", Stephen Leeb has a chart showing that a 50 to 100% rise in oil prices year over year has led to a range of performance for the S&P industrials of -11 to +17 over the following 18 months.

When the change in oil prices is >100%, the range for the S&P is -27 to +4.

Looking at what's happened to the market over the past couple of weeks, we may have hit the tipping point somewhere.

Stephen Leeb is scheduled to be on Bloomberg later today, let's see what he has to say.

Saturday, April 16, 2005

Partially, this is a portent of peak oil. It's also the very early signs of a transition to ... I don't actually know.

GTL (gas to liquid)?Electric cars charged off the grid at night from nuclear/coal/solar/wind?Coal liquification?All of the above?

There are those who say that none of these efforts are large enough to make a difference, won't come on fast enough, etc.

Instead, I say, we have a major problem:

The most useful energy source in the world is currently available in vast quantities at $2.251 a gallon.

There is nothing as flexible and useful that can compete with that price, and conversely, that cheap price (yes, cheap) encourages excessive and wasteful consumption. For proof, look no further than your neighbor's driveway. [I know you're being good, right?]

Unless that price goes fairly significantly higher, there is no economic incentive for these other projects to pick up meaningful marketshare.

Companies on a large scale will not magically sell oil alternatives at a loss. Consumers in aggregate will not pay for alternatives unless there is an economic incentive.

We need to be informing ourselves about peak oil. We need to be preparing for it on a personal / community / corporate / national / global basis. But there's nothing that will encourage change like high prices.

Which is to say, peak oil is the problem, I think it's also the solution.

In the biggest display to date of China's keen interest in Canada's vast oilsands resources, pipeline giant Enbridge Inc. and PetroChina announced a preliminary deal Thursday to anchor a new $2.5-billion oil pipeline on the West Coast.

Venezuela, the largest oil producer in South America, plans to force ChevronTexaco Corp., ConocoPhillips and other companies to convert contracts covering 32 fields into joint ventures with the state oil company so the country can earn more from petroleum sales.

Indonesia has failed since early 2002 to meet its output quota, currently at 1.425 million barrels a day, from OPEC.

Meanwhile, Exxon may stall development of Cepu, Indonesia's largest untapped oil deposit, for a fourth year because the state oil company, Pertamina, is demanding a bigger stake before extending a project license.

Being a believer in the peak oil concept, I've been speculating on how this concept manifests in the real world in terms of the timing, signals, and consequences. For right now, I'm trying to sort out my thoughts on the timing and signals, and of the various scenerios I've come up with, there is one that most stuck in my head.

If you remember the tsunami experienced a few months ago in Asia, you will remember the experience of the people on the beaches:

First - the rumblings of an earthquake far off in the distance. Disturbing yes, but little happened, so people went about their business. Some people recognized what the earthquake might stir up and headed for the hills.

Second - the day seemingly normal, the tide began to recede from the beach and the water in the distance grew murky. Those in the know recognized this for what it might be and now moved to higher ground, those who didn't either variously ignored it, scratched their heads and went about their normal business, or for some, wandered out into the newly exposed beach to see what was up.

Third - after a period of time, the water came back, but with such speed and mass that the people who had ignored the early warning signs were no longer able to get out of it's way, and were unfortunately swamped.

So basically: a stage of early signs, a stage of later and more urgent signs, and then a final stage where things get out of hand quickly and it's too late to do anything to avoid the full consequences. [By the way, I'm not a peak oil pessimist, so I'm limiting the comparison to the way the signs developed.]

Assuming that analogy works, the question then is when and where the early warnings are/were, when and where the urgent warnings are/were, and when and where the "it's here RIGHT NOW" moment is?

There have actually been two oil price spikes in the past few years, one in 1999-2000 and one 2004-2005, so it's possible the first one was the early warning and we're now in the urgent warning phase.

Since prices fell abnormally low in 1998, perhaps the 1999-2000 period was the pendulum simply swinging back, and then it's possible that 2004-5 is the early warning phase.

Finally, there is the possibility that neither of these is a warning, that right now we are just dealing with demand ramping up too quickly and the oil industry not having made investments in production due to the price collapse that occured into 1998.

I'll leave it up to you to speculate whether this analogy might be accurate, and, if so, what phase may have occured when.

An interesting interview with a fellow trying to track the future of oil by tracking the progress of the world's megaprojects. Based on his analysis, it looks like a shortfall in supply is looming.

A couple of interesting notes:

And an alternative analysis which is being used by the CIBC (Canadian Imperial Bank of Commerce) is to look at the potential shortfall and what price you'd need to close that shortfall by destroying demand. And the figures that they're coming up with are quite dramatic. They see this sort of shortfall increasing from about one mb/d in 2006 which they believe can be closed by the price rising to $61/b, and then they take it up to 2.8 mb/d the year after at $70 oil. 2008 they've got shortfall of 5 million barrels and $80 oil. 2009 they're up to $90 oil. 2010 they're up to $101 oil.

JD: In the light of much evidence, and in the light of your report, do you think that Ken Deffeye's suggestion of Thanksgiving 2005 being the time of peak, is too bold in your opinion?

CS: No, that is entirely possible. We're now into, you know, a sort of unknown land. We haven't been in this situation before. I don't think we know quite how to analyse it. We're taking traditional, fairly conventional analysis. And we're saying let's see what happens when we do this. And I suppose the rough answer we get is that from this year on it looks difficult to get it to add up comfortably. It certainly looks as though after about 2008 it really doesn't add up. But it's not quite clear what more you can say.

- It appears to him that more speculation was involved in the recent rise in oil prices, thus there may be more of a pullback than there was after November [the time of the last rise]. He expects a pullback of a few months. He would be surprised if we were to go back to new highs right away. Anecdotally, he observed oil is also mentioned in the media more and attracting attention via items like the Goldman Sachs report.

- He suggested oil prices are also partially a function of the US dollar. As the dollar strengthens, it tends to put a lid on oil prices. As the dollar has stabilized recently, oil prices have cooled off, which he believes will generally continue.

- He continues to view the Canadian oil sands stocks as the equivalent of long dated options on oil prices, which he believes will go higher.

- On housing - he argued that there is a housing bubble in progress, based on the prices and the argument of 'there is no risk involved, prices are only going to rise, demographics are on our side for the long term' that people are using. He noted that many of these arguments were used in Japan right before their real estate bubble burst, after which prices have fallen there for 13 years. He noted that when you compare the costs of buying vrs renting, housing prices appear unstable.

- On China - he believes they are also in a growth/investment bubble, which will probably deflate when the US housing bubble bursts. This will probably be kicked off by higher interest rates.

- On Internet stocks - he believes they are currently overvalued and would stay away. If forced to choose one name, he would pick Google. He is actually bullish long term as he believes the Internet growth trends will continue for many years, but at these prices he would stay away. "Great businesses, big challenges."

- Suggests the best rule is to avoid losing money, and since you cannot time the end of a bubble, he therefore he recommends owning no reits, no homebuilders, not buying a house at the current time if you don't have to, avoiding China stocks and Internet stocks.

"This is it. This is the dam break," said Ed Silliere, analyst with Energy Merchant Intermarket Futures (search). "I'd have to say the bull market is done."

If you go back through my recent posts, you'll see a number of people suggesting a weak period in the short to medium term, among them John Segner, Jim Rogers, Charles Maxwell and T. Boone Pickens, but they also all believe that longer term we are going higher.

Friday, April 08, 2005

Being a little lazy right now, I googled to see if I could cheat a little on this post. I found a couple of comments on the appearance here and here, but they don't capture the full picture of his comments (ie. I actually have to do some typing).

Anyway, T. Boone Pickens is definitely the guy everybody's watching on oil, so his short term comments may have added to the sell off this week.

Quotes:

"We're headed for $60, how quick, I don't know. This is the weakest period in the year, coming into the second quarter because the use of oil is down and you're building inventories and you come out of the second quarter into the third and you're picking up on demand. When you look at the fourth quarter, projections up to 87 million barrels a day are required worldwide, and I don't think you can produce over 84 million."

When asked whether supply and demand or speculation/manipulation is driving the price, he responded:

"I think it's legitimate supply and demand, if you'll give me 6, 8, 9 months, the rest of the year, it will be supply and demand. For the short term, there's no question we've got plenty of oil around right now, and I think you may see some weakness. But it's gonna move right on up. We'll make $60 by the third quarter for sure."

When asked about the deferred (long dated) contracts:

"Backwardation has changed dramatically in the market, and the out months have come up substantially. If you look at the fundamentals, I don't think there's any way anybody can come out with the conclusion, let's compare 2005 to 2007, if all you can produce now is 84 million barrels of oil a day, and I don't believe the supply you add will take care of the decline you'll have to deal with on older production. So if you can't do any more than 84 million barrels a day, all projections - unless you get into a collapse of the world economy - that you're gonna see demand greater in '07 than you see in '05."

[Translation: He thinks that the rise in deferred prices makes sense because he doesn't think production/supply can rise much and unless the world economy collapses, demand should continue to rise into 2007.]

When asked about Suncor (SU):

"Suncor is being evaluated about $30 - $35 a barrel. If you have $50+ a barrel, then eventually Suncor gets evaluated on the basis of $50. I still think Suncor is a very good investment."

Halliburton is a major oil services firm that has contracts all over the globe. The CEO of Halliburton was on CNBC the other day and was asked what his customers are doing in terms of investments in oil projects in the current environment.

He indicated that his customers are using a mid-20's oil price benchmark to test their potential investments against, and are not letting today's oil prices drive these decisions. He believes that oil companies are generally being much better conservators of their capital than they had historically been. [Historically, it's been boom to bust. I just read in Daniel Yergin's "The Prize" that due to serious overproduction of oil in East Texas in the early 1930's, oil prices fell to 13 cents a barrel. This threatened the entire oil industry so drastically that on Aug 17, 1931 martial law was declared in order to bring in Texas Rangers and guardsmen to East Texas to rein in overproduction!]

As a person who holds oil stocks, that's actually what I want to hear.

I reflected back to a trip I took to visit a friend in Houston back in the late 1980's, which was shortly after their oil bust down there. I saw a lot of brand new office buildings, shopping centers, etc that had obviously been built on spec and were completely empty and looking new, yet somewhat forlorn.

I guess it probably looked somewhat like what the pessimist Peak Oil folks envision for the whole country when things get really drastic.

Fitzpatrick said that while a "major top" on crude prices may be in place, there's still not a "wholesale shift" in the market's thinking.

For that reason, he predicts a continued struggle between those who think "the era of cheap energy is over" and "those who think the economic toll resulting from rising energy prices will ultimately kill demand."

As regards demand for gasoline, Phil Flynn, senior market analyst and vice president of Alaron Trading, said the big difference between this year's summer driving season and past seasons is that more and more is being asked of refiners.

After running at a record pace through the winter, they are expected to continue through spring and into summer.

"Can they pull it off? If yes, then I'd agree we've hit the peak in gas prices. If not, then we could be set up for yet another historic run. We'll all stay tuned," said Flynn.

Tuesday, April 05, 2005

Alan Greenspan gave a speech today on oil, suggesting that the market will work things out and the politicians ought to sit this one out.

His observations:

- Since his last speech on oil in October, prices are sticking higher.

- Believes that although in the short term demand may not fall off, if prices stick higher over the longer term, demand will fall and production will be encouraged to rise.

- Noted how important oil is to the U.S. economy and suspects businesses are now starting to make decisions based on higher oil prices. Suggests what happens visa-a-via the 200 million U.S. passenger vehicles is also important as they consume 11% of global oil production.

- In terms of reserves and production, he believes reserves are adequate but more and more concentrated in areas of geopolitical uncertainty. Should that uncertainty decline, it would be a positive. He believes that enhanced recovery techniques will help maintaining production, though notes discovery is down. He believes substantial investment is needed in production and refinery facilities, but since many of the producers are blocking private investment, this is an issue of some consequence.

- Goes into detail on natural gas, where the price has been elevated for a while as US production has not kept up. Believes the market will rectify this situation via the import of LNG. (High profit margins attract more profit seeking businesses, creates more competition, drives down prices, yada yada.)

- Mentions methane hydrates as possible future energy source, and the promise of GTL (gas to liquid). Generally, he has faith that the market will find a solution, one way or another.

Can the strength in natural resources last? Absolutely, insists raging oil bull Kenneth Heebner, who had three of his four Capital Growth Management funds among the quarter's top 100 funds. Energy investments helped drive the $1.1 billion CGM Focus fund up 10.1%. The case for continued gains: "Demand growth in China isn't slowing down," Heebner says, "and there's accelerating demand from India and other parts of Asia." Leigh Goehring, whose $655 million Jennison Natural Resources (PRGWX ) fund rose 9.8%, is also gung ho on energy. His 65% weighting in oil is the highest it has been in his 13 years at the fund.

While Heebner's top holdings include large caps such as Amerada Hess (AHC ), Goehring focuses on companies with projects in the Canadian oil sands. There, the high-cost process of extracting bitumen out of oil sands has become more economical as oil prices have risen. His favorite pick in the sector is Opti Canada. (His fund was a backer of the company when it was private.) He also likes Canada's Suncor Energy (SU ). "Companies with access to long-lived, robust reserves will be the winners," says Goehring. "For practical purposes there are unlimited reserves in the oil sands, and these companies are still cheap."

Basic argument: There is no real supply problem, high prices will lower demand, and the filling of the Strategic Petroleum Reserve will end in August, adding to supply.

My take: Technically, he's right. If you can go down the street and buy gas without problem then there's no supply problem, right? But if the oil market is like the stock market then it's more about the future supply than current supply, which was after all traded a number of months ago. He makes no mention of peak oil [not entirely a surprise], but no mention even of the problems oil companies are having replacing reserves and no mention of the fact that the 'new' oil is increasingly heavy crude, which is less desirable and responsible in part for the premium placed on light, sweet crude.

With all these people saying we go down, it's good to ponder why we might go down. Jim Rogers also felt there might be a possibility of a slowdown in China.

By the way, the answer to all this confusion is dollar cost averaging, assuming you believe the basic story.

He's calling for a top in the commodities, but it sounds like he's talking an intermediate term top because he mentions buying them back later.

Quotes:

It's not just oil. I feel the same way about other commodities like gold, metals, foodstuffs and all the basic materials. Energy and basic materials have been the best performing sectors by a long shot during this bull market. But that's over. I'm calling the top. Without accelerating inflation pumping up prices, those sectors are going to have to make it on the merits just like any other, from here on out.

So I'm looking for opportunities to sell winners in the energy and basic materials sectors, and there have been some big ones in both. But if I'm right about all this, there may be an opportunity to buy them back cheaper at some point later this year.

There's also a tad of a hole in his logic, me thinks. Rises in commodity prices can cause accelerating inflation. Which came first? So far, the pass through from oil prices to other items has been lower than the rise in oil. Not for long though.

I thought there wasn't very much that could shock me on the subject of oil until today I heard Martin Whitman of Third Avenue Value Funds extolling the virtues of Suncor (SU) on Bloomberg TV.

Martin Whitman is a well known value investor who does his homework. When there is something cheap around, he'll usually be there. And not just the obvious cheap stuff either, he and his firm tend to dig a while before they come up with something.

He was in Kmart bonds before they went bankrupt and I'm sure he made out nicely when they went bankrupt and he came out with equity.

Anyway, on oil: Suncor, Encana, Nabors, Tidewater, Pogo, St. Mary, Whiting. Each in one of his various portfolios.

So we've amassed an interesting list: Jim Rogers, David Dreman, Douglas Cliggott, Martin Whitman, the American Funds, Ken Heebner. These are world class allocators of capital who have withstood the test of markets and time. (I'd throw Peter Thiel in there, but his record, although promising, is fairly short.)

A lot of people have been puzzling over why the 10 year bond hasn't really moved very much as the Fed keeps raising rates.

I've been wondering if it's not because we're going to have an old fashioned oil shock within that time frame, which could cause a global recession and thus global stock markets to tank, and make the good old US Treasury bond look like the genius trade of the decade. (Other than possibly oil stocks.)

There's an article here with further analysis of the Goldman Sach's report last week.

Say you'll be there I'll change my clothes and cut my hair Say that you might I'd sit outside your door all night Quiet as a mouse Say yes and I'll go to our mom's house If you say you care I'll go to the foot of our stairs

But are you leading on me on Or is there something behind it? Well I don't know but I mean to find out Is there something you're hiding?Oh are you leading me on Look are you having me at it Well I don't know but I mean to find out Come on are you are you leading me on?

Hey hey, mighty brontosaurus,Don't you have a lesson for usThought your rule would always last,There were no lessons in your pastYou were built three stories highThey say you would not hurt a flyIf we explode the atom bombWill they say that we were dumb

- Observes that as a result of the ongoing scandals with major corporations, people are losing faith in the market, and this historically has led to bad markets.

- Presents some strong charts of various metal oriented producers, but doesn't really come to a conclusion either way whether this will continue, especially if China and/or India cool off.

- On oil, he believes that because Saudi Arabia's new oil is mostly in the form of heavy, sour and much of their 'new' production is really supplanting declining production in other fields (including Ghawar - the mother of all oil fields), it's a harbinger of the fact they are past peak.

- "from here on, energy demand can only be constrained by runaway prices"

- "With OPEC's excess capacity apparently tapped out, oil consumers have lost their security blanket against petrochills, and oil traders and speculators have the largest-scale commodity free market the world has ever known."

- "However the powerful performance of oil stocks has meant that Street strategists have a new arguement to back the recommendation they've been making most of the time for three years; sell overpriced oil stocks and buy cheap tech stocks. Since the oil stocks are way up from the prices the Street recommended selling them, then they must be the new bubble."

- Mentions oil sands and a new process Opti Canada and Nexen have developed (Peter Thiel is smiling here, I'm sure) that - may - further decrease the cost of production to single digits at the wellhead.

Saturday, April 02, 2005

The article points out the similarities between the tech bubble and the current situation with oil stocks. But it's not that simple.

1 - The valuation situation is completely different.

2 - The supply and demand situation with oil is different than with tech.

3 - Ask yourself how many people you know who are talking about buying oil stocks, versus how many people were talking about tech stocks circa 1998-2000.

4 - We may be at a short to medium term peak, but in the long run we likely have higher to go.

You'll have to decide for yourself. I think Charles Maxwell's opinion has to be considered, he is one of the people I follow.

Quotes:

As evidence that the current craze is less crazy, McVey notes that despite the surge in energy stocks, they only make up 8.8 percent of the Standard & Poor's 500 -- a far cry from tech's 33.5 percent in early 2000. Plus, the price of energy stocks is only 14.5 times forward earnings, compared to 50.6 times in the technology sector as the bubble burst.

Weeden oil analyst Charles Maxwell says it's a mistake to think that oil prices will simply continue upward. Historically, there have been times -- like the present -- when prices climbed sharply, but eventually the high prices curtail demand and slow the economy. For example, notes Maxwell, people stop buying SUVs.

It takes awhile, but when demand slows, oil prices come crashing down, and so do oil company stocks, Maxwell says.

Prices could be particularly fragile now because about $5 to $10 of the $55 price a barrel is being driven by speculation, he says, rather than fundamentals such as supply and demand. In other words, hedge funds are speculating in the futures market because the price of oil keeps rising. But the speculation is driving the price up. If speculators see any hint of worldwide demand easing -- even temporarily -- they could get nervous and pull away. That alone could cause prices to fall.

Consequently, Maxwell suggests that investors avoid putting new money into oil stocks for six months to a year. Then, after oil has fallen to about $45 a barrel and stocks have corrected, he thinks oil stocks will be a profitable investment.

Meanwhile, because of tight supplies and the need to drill for more, he and Charlie Ober, manager of the T. Rowe Price New Era fund, say even today they would buy stock in large oil service companies. Ober says he likes Schlumberger and Baker Hughes.

The Peak Energy blog had a post I've been meaning to link to on a Hubbert's Peak in action in terms of what happened with whale oil.

The lesson: As a Hubbert type peak manifests, prices swing fairly violently up and down, within the context of a rising trend.

There's an unfortunate kicker: Whale oil had a lot of uses, but crude oil is much more entrenched in our way of life. And whale oil was starting to get scarce just as coal oil and fuel oil were rising as worthy substitutes that proved far more reliable and plentiful.

Are we gonna get that lucky again? [I'm sure the whales are hoping so!]

I believe they used to call Ken Heebner "the Mad Bomber" on Wall Street because he concentrates his positions so much and has a tendency to blow them out in one shot. They don't seem to call him that anymore, or maybe the guys who gave him that name sank in the Internet bubble and went away.

Last year, Heebner started building positions in the energy sector -- at a time when few investors anticipated that oil prices would spike. But he decided that investors were underestimating how demand from rapidly emerging markets like China would overwhelm limited supply and push energy sector stocks as well as oil prices higher.

On that basis, he determined that oil and gas stocks were bargains. As of Dec. 31, the most recent data available, energy-related shares represented 35% of the Focus fund, according to Morningstar.

"In order to take this position, I've had to be willing to discredit the conventional wisdom," Heebner explained. "When I took my position in energy, no one agreed with me. When I bought the homebuilders, everyone thought it was strange."

Now that homebuilding stocks are more popular, Heebner is less interested. Not so for energy stocks. Using a $50 per barrel estimate for oil, Heebner said he believes that oil company shares are trading at a 40% discount to the Standard & Poor's 500 Index (SPX: news, chart, profile) multiple.

"I see no evidence at this point that high energy prices are going to fade," he noted. "This is a very significant opportunity."

The oil ministers of OPEC, frustrated at their inability to maintain ranks on oil production and general inability to control the price of crude oil, today announced that they are breaking up the cartel and forming a boyband.

They've already released their first single, a remake of the Police's "Every Breath You Take" entitled "Every Trip You Take".

Lyrics:

Every trip you takeEvery move you makeEvery hill you partakeEvery oil thirst you slakeI'll be making money off you

Every single dayEvery time you go awayEven if you just say You'll only drive once todayI'll still be making money off you

O can't you seeYou belong to meHow my poor wallet fills, with every drive you take

Every trip you takeEvery move you makeEvery hill you partakeEvery oil thirst you slakeI'll be making money off you

Since you got that big SUV I've been laughing my ass offI dream at night and I can only see dollar signsI look around and I don't know where to put it allI'll keep working on it though..

Every trip you takeEvery move you makeEvery hill you partakeEvery oil thirst you slakeI'll be making money off you

President Bush today signed into law his landmark oil legislation, the "No OPEC Nation Left Behind" Act of 2005, which sets certain minimum standards of oil production that each member of the OPEC cartel will be held to, and authorizes the use of military encouragement should any member state fall behind on meeting their minimum quotas.

Immediately after signing the legislation, the President ordered the US Navy to move four carrier battle groups into position to assist in state takeovers of the most troubled OPEC nations, Venezuela and Iran, which are viewed as potentially likely to miss their quotas this year.

President Hugo Chavez of Venezuela belted out an immediate statement in reaction to the President's legislation:

The T-Mobile Sidekick hacker has struck again, this time hacking the contents of former Deputy Secretary of Defense Paul Wolfowitz's Sidekick and posting them for all to see on various public forums on the Internet.

The contents reveal shocking details of an NSA funded disinformation campaign and Watergate style conspiracy designed to spread fear of an oil peak and crisis among the United States population. The apparent intent was to cause such chaos and panic among voters that they would increasingly turn towards nationalistic, strong-arm leaders, thus ensuring the re-election of generations of Republicans to positions of power for decades to come. The top secret operation was known under the designation: "Peak Oil for Food", food in this case a euphemism for Republican votes.

E-mails posted from Mr. Wolfwitz's Sidekick reveal messages between Mr. Wolfwitz and Richard Heinberg, Mike Ruppert and others associated with the "Peak Oil" movement indicating that they are in fact clandestine CIA operatives, in turn using the revenues they accumulate from their various activities to fund the arming of Tibetan Nationalists [which actually turns out to be fairly cheap].